Monday, September 18, 2006

Calls of Note Part 2

Merrill Lynch doing scenario analysis for Cephalon's (NASDAQ:CEPH) Fentora, noting that the FDA action date for Fentora, CEPH's follow-on to Actiq for breakthrough cancer pain, is 9/25. We expect final approval and launch in early 4Q. The ability of Fentora to gain market share will have important implications for the stock, as Actiq (roughly 1/3 of revenue) is facing imminent generic competition.

Firm believes that CEPH's success at driving Fentora market share will depend in large part on how well the product is clinically differentiated relative to Actiq. They view the most significant potential advantages as the easier-to-use formulation (fast-dissolve tablet vs. lollipop stick) and favorable pharmacokinetics (Fentora achieves a higher plasma concentration in a shorter period of time), which could lead to more rapid onset of pain relief.

In their official model (Base case) firm assumes that Fentora is launched in 4Q06 and achieves peak market share of approximately 1.85% by 2010. For reference, Actiq previously achieved peak share of 3.4% (current share is 2.8%). Firm assumes that Fentora erodes share of Actiq (brand and generic) by roughly 25% over time. They believe that their Base case share assumptions are reasonable and potentially conservative based on what we know today.

For an Upside case, firm assumes Fentora peak share of 2.5% by 2010. They believe that Fentora will have to be favorably differentiated to achieve a share close to the current share for Actiq, given that the latter has never faced strong competition (from brands or generics). Note that Cephalon expects the label for Fentora to reflect its favorable pharmacokinetics (higher Cmax, shorter Tmax). This case does not factor in label expansion, so they do not view it as a"Best" case.

The Downside case assumes that Fentora gains share more slowly relative to the Base case, in part due to the availability of cheaper generic Actiq and/or lack of significant differentiation. Also, they believe that Cephalon could have a more difficult time driving market share if the Fentora launch is delayed beyond 4Q.

To assess a Worst case scenario, firm removed Fentora from our model. They also reduced SG&A assumptions, as they would expect the company to rationalize expenses in this scenario. Firm believes that this scenario is unlikely.

Firm's base case yields a theoretical valuation of $68, while Upside and Downside cases would lead to theoretical fair values of $81 and $49, respectively. A Worst case in which Fentora never gets to market would lead to a theoretical fair value of $39.

Notablecalls: Not actionable but good to know category. Just as the mkt is starting to forget about Sparlon, CEPH is up for a new saga.